Tax Abatements

As one of its most effective economic development tools, the Tyler Economic Development Council (TEDC) has used tax abatements to encourage new investment in the Tyler area. A persistent myth regarding the use of tax abatements is that they REMOVE taxes from the tax rolls. In fact, all tax abatement projects continue to generate the same amount, if not more, of taxes as they did prior to being approved for the abatement. The taxes that are abated apply only to NEW capital investment in real and personal property and can never be applied toward the purchase of land or on existing plant and equipment. This is very attractive to new and existing companies that want to expand in our area. Most tax abatements have averaged 5 years, but can extend up to a maximum of 10 years. After the abatement period has expired, all the new investment becomes taxed at the current assessed tax rate.

Eligibility

Tax abatements are primarily considered for manufacturing or distribution facilities, corporate offices, research parks, major tourism attractions, or similar facilities if it can be demonstrated their development would create substantial capital improvements or jobs. The minimum project requirements are:

Capital cost (new plant and/or equipment) to be $1 million (real and personal property are eligible; land is excluded)

New annual payroll of $400,000

Minimum of 25 new full-time jobs to be created

A project must have at least ONE of these minimum requirements. The maximum allowable term for an abatement is 10 years, although most projects, based on real investment and job creation, average 4-5 years.

Approval Process

The following reviews must occur in order to assess the eligibility, amount, and term of an abatement project.

A prospect's eligibility is determined by economic development staff.

A review committee appointed by affected taxing entities considers the request for tax abatement and makes a recommendation to the affected taxing entities.

An abatement contract is negotiated with the company by the Chief Executive Officer of the taxing entity initiating the project and a representative of the TEDC.

Annual Review

After an abatement project is approved, the company must report their annual investment and job growth progress for each year of their abatement. If the company fails to meet the abatement contract terms regarding job creation, the abatement may be terminated or reduced relative to the company's job creation progress. For example, if a company only created 80% of the total jobs they were expected to create, they may only receive 80% of the abatement and would have to pay taxes on the remaining 20%.

Project Example

As an example, assume a plastics manufacturer has added a new product line and wants to expand and is considering an offer to relocate to Nebraska or expand its operations here in Tyler. If they expand in Tyler, it is estimated that it will cost the company $40,000,000 for a new production line and equipment and will result in the creation of 50 new jobs. The TEDC wants to keep the company in Tyler and approaches executives to discuss the possibility of a tax abatement.

After reviewing the details of the project, the TEDC meets with a review committee which agrees that the company would be eligible for a 5-year tax abatement agreement under the condition that the company create all 50 new jobs by the end of the third year of the abatement. The TEDC and company representatives meet with all participating local taxing jurisdictions for their approval, with the exception of the Tyler Independent School District (TISD). By State law, school districts cannot participate in tax abatements! The company is located within the City of Tyler limits and is subject to taxes from the following jurisdictions:

Taxing Entity

2011 Tax Rate

(per $100 valuation)

City of Tyler

$0.2089

Smith County

$0.3239

Tyler Junior College

$0.1822

TISD

$1.375

TOTAL

$2.09

TOTAL less TISD rate

$0.715

Before the $40,000,000 project begins, the company has $125,000,000 in taxable assets. Using 2011 tax rates, the company is paying approximately $2,612,500 in property taxes each year ($125,000,000 x $2.090000/ $100).

The abatement agreement is approved and the company decides to stay in Tyler. The company will continue to pay the estimated $2,612,500 in property taxes on their current taxable assets plus the taxes assessed by Tyler ISD on the new equipment, which amount to an additional $550,000 ($40,000,000 x $1.375000/$100). The company must report the total amount of new investment and new jobs created each year. The following table summarizes their progress over the 5-year period:

Year

Cumulative

Cumulative

Assessed

Annual

New Jobs

New Investment

Tax Rate

Taxes Abated

1

15

$20,000,000

x

0.715

/

$100

=

$143,000

2

38

$35,000,000

x

0.715

/

$100

=

$250,250

3

52

$37,000,000

x

0.715

/

$100

=

$264,550

4

55

$38,000,000

x

0.715

/

$100

=

$271,700

5

57

$41,000,000

x

0.715

/

$100

=

$286,000

As you can see, the company was able to create the 50 new jobs by the end of year 3. If you add all the amounts from the "Annual Taxes Abated" column, you can see the the abatement allowed the company to save $1,215,500 in taxes over the 5-year period! Notice also that they exceeded their investment in year 5. The agreement, however, limits their benefit to only $40,000,000.

The Benefits of Tax Abatements

As you can see, Tyler has a tool that can benefit many capital-intensive companies moving to Tyler or already operating in Tyler, without removing the benefits of the current tax income. This provides area companies a competitive advantage and creates new jobs and wealth. Although we have demonstrated the direct benefits to the company and local taxing jurisdictions with the example above, this project would have a multiplier effect with indirect benefits. These new jobs would provide higher wages and benefits to existing and new residents, who could spend their new salaries to improve or buy a new home, purchase nice clothes, and improve their overall quality of life. Their activity would generate even more property and sales taxes that are indirectly induced by this project. Perhaps the project brings several new families to the area. This would require more doctors, firefighters, teachers, etc. and provide more job opportunities in Tyler. As more jobs and wealth are created, retailers open in Tyler to provide new services to the growing population. As more retailers arrive, competition increases and drives prices down, benefiting all who live in or visit Tyler.

As simple a tool as it may seem, tax abatement has a tremendous impact on our economy!

Download

The Texas Municipal League has assumed editing and publication of the Economic Development Handbook. The publication, originally prepared by the Texas attorney general’s office, had become out-of-date. League staff, as well as several recognized legal experts, have updated the handbook and posted it online. It will be updated following each session of the Texas Legislature. The publication is only available online and can be downloaded in PDF format.

Contact Information

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